Two new decisions handed down from the federal appeals court this month give borrowers a clear path to challenge the lender’s right to foreclose on them -- and may clear the way for foreclosure defense attorneys to upend the mortgage securitization market.
The cases, Juarez vs. Select Portfolio and Culhane vs. Aurora, turn on whether a borrower has a right to challenge the validity of the servicer’s assignment of a mortgage.

Banker & Tradesman Battle Lines

Cases Could Make Foreclosure Challenges Easier Assignments’ Validity Could Be Questioned
By Colleen M. Sullivan Banker & Tradesman Staff Writer March 3, 2013 Two new decisions handed down from the federal appeals court this month give borrowers a clear path to challenge the lender’s right to foreclose on them -- and may clear the way for foreclosure defense attorneys to upend the mortgage securitization market. The cases, Juarez vs. Select Portfolio and Culhane vs. Aurora, turn on whether a borrower has a right to challenge the validity of the servicer’s assignment of a mortgage. During the boom, sloppy paperwork often meant that transfers between one servicer and another were not properly recorded. Often, the necessary paperwork to notify registrars of the change in ownership was only filed after the foreclosure itself was completed. In the Eaton case, the Massachusetts Supreme Judicial Court (SJC) ruled that in order to begin a foreclosure the servicer must possess both the mortgage and the note (or be acting as the agent of the note-holder). In the Ibanez case, the SJC had ruled that a servicer could not begin a foreclosure unless a mortgage had been legally transferred into its name (assigned), but that a post-foreclosure filing might be valid if the servicer could produce evidence that the paperwork was merely to “confirm” a prior assignment which had not been recorded. For a borrower, however, attempting to prove that a bank had started a foreclosure without meeting the standards laid out in Eaton and Ibanez could prove difficult. Massachusetts does not require a judge’s approval to conduct a foreclosure, and so borrowers have to do their own spadework if they want to challenge a foreclosure, and may not have access to all the relevant documents. When borrowers do launch a court action, servicers have often succeeded in moving such cases to federal courts. Many federal judges had been sympathetic to servicers’ argument that the borrower’s obligation to repay the note doesn’t change, regardless of which servicer possesses their mortgage – so even if a transfer was fouled up, a borrower didn’t have the right to challenge it. Many cases which questioned

whether assignments met legal standards were therefore summarily dismissed by federal judges. The two new federal appellate cases make it easier for borrowers to raise such questions, ruling that borrowers do have the right to challenge an assignment in order to prove a foreclosure was improper, and that merely stamping a document with a certain date is not enough to establish that an assignment’s is confirmatory. “What’s important about this case is that the First Circuit rejected a line of argument that’s been appearing around the country that borrowers don’t have the authority to challenge whether their assignments were valid,” said Geoff Walsh, an attorney at the National Consumer Law Center in Boston who specializes in foreclosure law. “That’s not really been based on sound reasoning, and this is the first decision from any of the circuits that’s rejected that, clearly.” ‘Wakeup Call’ At the same time, the First Circuit also gave a clear stamp of approval to the role of the Mortgage Electronic Registration System (MERS), a Virginia-based entity which acts as a holding company for the majority of American mortgages, allowing them to be transferred between servicers without the transfer being publically recorded. The rulings are “a wakeup call” for attorneys to make sure assignments in proper order, said Rich Vetstein, an attorney in private practice in Framingham and author of the Massachusetts Real Estate Law Blog. Title companies are giving close scrutiny to such matters, and anybody looking to buy or sell a property with a foreclosure in its past will have to be prepared to deal with the assignment issues. “If a title company were to see [a potentially back-dated assignment], they’d make you’d file an affidavit confirming that you had reviewed their files,” and there was evidence that the mortgage had been assigned before the foreclosure proceeded said Vetstein. “That might be tough to do, but that’s why you’ve got to do. It’s got to be thorough.” As a practical matter, the two cases may have limited impact in terms of preventing or overturning foreclosures. Declaring that a borrower has a right to question an assignment is a very different thing from proving that an assignment was invalid, said Chris Pitt, a partner at Robinson & Cole in Boston and past president of the Real Estate Bar Association. “My guess is that the [Juarez case itself] won’t go any further than this,” said Pitt, “though it did confirm that the mortgagor had standing,” to raise the issue.

More importantly for the future, the First Cicuit’s ruling in these case will allow foreclosure defense attorneys to pursue a line of argument that could have a huge impact on the entire mortgage securitization market: Whether or not the failure to properly assign the mortgage from one entity to another violates the terms of securitization trusts. In essence, lawyers argue that due to the strict rules governing how trusts operate, if a mortgage was not properly assigned before the mortgage was securitized, the investors who now own the security might not have the right to conduct a foreclosure. “If those deadlines and terms aren’t met does that make those assignments void? And if it does, how does that impact a foreclosure?” said Walsh. Courts have yet to rule on the issue, but the First Circuit’s decision will clear the way for borrowers’ attorneys to raise it. It’s unclear how many loans would be impacted if courts were to rule in borrowers’ favor, but with more than 7 percent of American mortgages delinquent, such a ruling could cause devastating upheaval in the mortgage market. - See more at: http://www.bankerandtradesman.com/news154052.html#sthash.KkqjCdKl.dpuf